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Gathuya - The Relationship Between Net Operating
Gathuya - The Relationship Between Net Operating
BY
JOHN WATHU t V g ATHUYA
NOVEMBER 2005
This project is my original work and has not been presented for a degree in any other
university.
This project has been submitted for examination with my approval as university
supervisor.
Signed
Faculty o f Commerce
University of Nairobi
11
DEDICATION
My special appreciation goes to my supervisor Mr. Moses N. Anyangu for the advice and
My thanks also go to my parents, my brother Sam and his family and my wife Grace
Wanjiru for their support and understanding throughout the entire course.
Lastly I thank all my colleagues at Oakland Media Services Limited for their
encouragement.
IV
ABSTRACT
Although many business people make decisions on profitability and relate them to the
value of firms quite well at a decision making level, this relationship is not clear to many
study has been done to affirm the decisions. There is therefore a staring gap and this is
the reason for which this study has been done to find out if there is any relationship
between the Net Operating Income, and the value of firms quoted at the Nairobi Stock
Exchange.
To achieve this objective, regression analysis was used to establish the relationship. F-
ANOVA test showed that the relationship is statistically significant for all the firms under
study. The study failed to reject the hypothesis that there is no significant relationship
between the Net Operating Income and the value o f the firm. That means that the Net
Operating Income has a significant effect in the value of the firms quoted at the Nairobi
Stock Exchange. The y-intercept showed a significant value o f y meaning that there are
other factors that significantly affect the value o f the firm, other than the profit.
v
TABLE OF CONTENTS
DECLARATION.....................................................................................................................II
DEDICATION....................................................................................................................... Ill
ACKNOWLEDGEMENTS................................................................................................. IV
ABSTRACT..............................................................................................................................V
1.1 Background..................................................................................................................................... 1
1.2 Statement of the Problem .......................................................................................................... 4
1.3 Objective of the St u d y ..................................................................................................... 5
1.4 Importance of the Study ..............................................................................................................5
2.0 LITERATURE REVIEW.......................................................................................... 7
2.1 Researcher’s V iew ......................................................................................................................... 7
2.2 Evaluation of a F irm ’s Earning Power...................................................................................14
2.2.1 Profitability Ratios.................................................................................................................... 14
2.2.2 Market Value ratios.....................................................................................................................15
2.3 Other V aluation Methods................................................................................................................. 16
2.3.1 Capital Asset Pricing Model (CAPM).......................................................................................16
3.0 RESEARCH METHODOLOGY........................................................................... 20
3.1 Population .....................................................................................................................................20
3.2 Sample............................................................................................................................................. 20
3.3 D ata Collection .......................................................................................................................... 20
3.4 D ata A nalysis ................... 21
4.0 DATA ANALYSIS, FINDINGS AND DISCUSSIONS............................................ 22
4.1 Introduction ..................... :......................................................................................................... 22
4.2 Regression A ssumptions.............................................................................................................22
4.3 Estimated Linear R egression Mo d el ......................................................................................25
5.0 SUMMARY OF FINDINGS, CONCLUSIONS AND
RECOMMENDATIONS...................................................................................................... 28
5.1 Implication of Results and Recommendations ....................................................................28
5.2 L imitations of the Study ............................................................................................................29
5.3 Suggestions for Further Research .........................................................................................30
6.0 REFERENCES.................................................................................................................31
7.0 APPENDICES............................................................................................................ 33
7.1 APPENDIX 1: LETTER OF INTRODUCTION............................................................................. 33
7.2 APPENDIX II: DATA COLLECTION FORM................................................................................34
7.3 APPENDIX III: LIST OF COMPANIES......................................................................................... 35
7.4 APPENDIX IV: EARNINGS BEFORE TAX EBT (000’S)..........................................................36
7.5 APPENDIX V: MARKET VALUE OF FIRMS (000) (MARKET CAPITALIZATION)........37
7.6 APPENDIX VI: MEAN VALUES (000’S ) ...................................................................................... 38
VI
CHAPTER ONE
INTRODUCTION
1.1 Background
The argument as to the relationship between net operating income and the value of a firm
has remained a puzzle in Finance for many years. Some researchers believe that there is a
fundamental relationship between the two parameters, yet others argue to the contrary,
that other factors other than the Net Operating Income are responsible for the value of
firms.
Early studies conducted by researchers like Durand (1959) indicated that the value of
firms is affected by the Net Operating Income (Profitability) and not capital structure.
According to the Net Operating Income approach, the cost of equity is assumed to
increase linearly with leverage. As a result, the weighted average cost o f capital remains
constant and the total value of the firm also remains constant, as leverage is changed.
The proponents of the Net Operating Income approach assume that investors have an
entirely different reaction to corporate debt from the traditional investors. They assume
that investors value Net Operating Income (or Earnings Before Interest and Tax-EBIT) at
1
A constant WACC results in a constant value for the firm regardless o f its use of debt and
also a constant WACC, along with a constant cost o f debt, implies that cost of equity
increases with leverage, and hence that the stockholders regard the use o f leverage as
Ross and Westerfield (2002) argue that a firm cannot change the total value o f its
outstanding securities by changing the proportions of its capital structure. The value of
The proponents of the Net Income approach are of the view that a firm can increase its
total valuation and lower its cost o f capital, as it increases the degree of leverage
Modigiliani and Miller (1958) have a similar position to that o f Durand. They advocate
that the relationship between the leverage and the cost of capital is explained by the net
operating income approach. They make a radical departure from the traditional approach,
and offer behavioral justification for having the cost of capital remain constant through
all levels of leverage, and put forward an argument that the total risk for all security
holders o f a firm is not altered by the changes in the capital structure. The total value of
2
Arbitrage precludes perfect substitute from selling at different prices in the same market.
In this case the perfect substitutes are two or more firms in the same homogeneous risk
In this respect, MM contends that the value of these firms has to be the same; otherwise
arbitragers will enter and drive the values of the two firms together. The essence of their
argument is that arbitragers are able to substitute personal leverage for corporate
leverage.
A firm cannot change its value, or its weighted average cost of capital by leverage. The
financing decision does not matter from the standpoint of our objective of maximizing
market price per share. One capital structure is as good as the next (MM). Therefore, the
value of the firm is affected by other variables rather than capital structure.
The value of a firm depends upon its expected earning streams and the required rate of
return. Thus, the capital structure decision can affect the value of the firm either by
changing the expected earnings or the cost of capital or both. Leverage cannot change the
total expected earnings of the firm, but it can affect residue earnings of the shareholders.
The issue of valuation is very important in Finance and Management. A great deal of
This study is aimed at establishing whether there is any relationship between the net
operating income and the value o f Kenyan firms. The study involved analyzing
3
profitability o f firms quoted at the Nairobi Stock Exchange for a period of 10 years and
comparing it with its valuation, which was represented by the share prices.
Theories advanced show conflicting results on what is responsible for changes in the
value of a firm. According to the Net Income approach, the firm can increase its value or
lower the overall cost of capital by increasing the proportion o f debt in the capital
On the other hand, the proponents of the Net Operating Income approach argue that the
market value of the firm is not affected by the capital structure changes, but by
capitalizing the net operating income at the overall, or the weighted average cost of
MM in their first proposition (1958), argue that for firms in the same risk class, the total
market value is independent of the debt-equity mix and is given by capitalizing the
expected net operating income by the rate appropriate to that risk class.
4
This study aimed at establishing if any relationship exists between Net Operating Income
(Profit) and the value of firms listed in the Nairobi Stock Exchange. In order to study this
Ho: There is no relation between Net Operating Income and the value of a firm.
Ha: There is a relationship between Net Operating Income and the value o f the firm.
To find out if there is a relationship between the Net Operating Income and the value of
Useful to scholars who intend to analyze the content of information contained in financial
Investors will be able to make informed decisions on whether to await trading results
5
Financial consultants will be able to offer proper advise to clients on the possible effects
Scholars who may wish to use the findings o f this study as a basis for further research on
this subject.
6
CHAPTER TWO
Literature Review
Many theories have been advanced on what affects the value of the firm.
Modigiliani and Miller in their original proposition (1958) advocate that the relationship
between the leverage and the cost of capital is explained by the Net Operating Income
Approach. According to them, the market value of the firm is not affected by the changes
in the capital structure. The market value is found out by capitalizing the net operating
They showed that a company’s capital structure is irrelevant in a perfect financial market
because investors can accept the company’s decision or reverse its effect on their
portfolio by borrowing or lending their own money without adding costs to them. A
and freely available to everyone, securities are infinitely divisible, and the market is
competitive.
According to the traditional approach to valuation and leverage, debt can affect the value
° f the firm. It assumes that there is an optimal capital structure and the firm can increase
its total valuation through a judicious use of debt. According to this approach the cost of
capital declines and the value of the firm increases with leverage to a prudent debt level.
After reaching the optimum point the cost of capital increases and the value of the firm
7
declines. It asserts that as long as the level of borrowing in a firm does not go beyond a
certain level, the value of the firm will continue to grow with the increased use of debt.
The cost o f capital declines with leverage because debt capital is cheaper than equity
An optimal level of debt is that where the benefits from tax equal the costs o f bankruptcy.
Beyond this point the value of the firm begins to decline. (Brealey and Myers, 2001).
According to a study by Myers (1984) at this point the value of the firm is maximized
In the same thread, Solomon (1963) argues that a firm with certain structure of assets and
that offers net operating earnings of given size and quality, and given a certain structure
of rates in the capital markets, there should be some specific degrees of financial leverage
at which the market value of the firm’s security will be higher (or the cost of capital will
Durand (1959) came up with two extreme views on the existence o f optimum capital
structure:
The Net Income Approach proposes that the firm is able to increase its total valuation and
lower its cost of capital, as it increases the degree of leverage. According to this
approach, a firm can lower its cost o f capital continually and increase its total valuation
8
The net Income approach is based on assumptions that the use of debt does not change
the risk perception o f investors and this results in the equity-capitalization rate and debt
rate is less than the equity-capitalization rate and the corporate income tax does not exist
among others.
With constant annual Net Operating Income, the overall cost of capital will decrease as
The overall cost of capital can also be measured by ko=ke- (ke-kd) D/V
When a Company uses the accrual method of accounting to recognize costs and income,
there arises a difference between the Net Income and the cash flow. The accrual method
assigns costs and revenue to the Accounting period in which a transaction takes place
rather than the period when cash is paid or received. Consequently, net income does not
equal net cash flow when there are credit sales or purchases or when expenses that did
According to the Net Operating Income approach, investors are assumed to have an
entirely different reaction to corporate debt. It assumes that investors value Net Operating
9
Average Cost of Capital results in a constant value o f the firm regardless of its use of
debt and a constant WACC along with a constant cost o f debt implies that cost o f equity
increases with leverage, and hence that stockholders regard the use of leverage as
increasing the riskness of the equity cashflows. If the Net Operating Income assumptions
are true, then the capital structure decisions are unimportant (Gapenski et al, 1988.)
The market value of the firm is found out by capitalizing the net operating income at the
overall, or the weighted average cost of capital, which is a constant. The market value of
V= (D+S) =NOI/ko
Where lq, is the overall capitalization rate and depends on business risk of the firm. It is
The market capitalizes the value of the firm as a whole. Thus, the split between debt and
The market uses an overall capitalization rate, to capitalize the net operating income. Ko
depends on the business risk. If the business is assumed to remain unchanged, lq, is a
constant.
10
The use of less costly debt funds increases the risk of shareholders. This causes the equity
capitalization rate to increase. Thus, the advantage o f debt is offset exactly by the
However, in a world with corporate taxes, both the Net Income and the Net Operating
Income approaches would indicate that the optimal capital structure calls for virtually a
The Modigiliani and Miller hypothesis is identical with net operating income approach.
They argue that, in the absence o f taxes, a firm’s market value and the cost o f capital
remain invariant to the capital structure changes. They support the NOI approach by
providing logically consistent behavioral justifications in its favor in their 1958 article.
Firm’s business risk can be measured by the standard deviation of EBIT and firms with
the same degree of business risk are said to be in a homogeneous risk class.
All present and prospective investors have identical estimates of each firm’s future EBIT,
that is, investors have homogeneous expectations about expected future corporate
11
Stocks in bonds are traded in perfect capital markets. This implies among other things
that there are no brokerage costs and the investors, both individuals and institutions, can
The debt of firms and individuals is riskless, so the interest rate on debt is the risk-free
rate. Further, this situation holds regardless of how much debt a firm (or an individual)
issues.
All cash flows are perpetuities; that is, the firm is a zero-growth firm with an
‘Expectation ally constant’ means that the best guess as to the EBIT for any future year is
the same as for any other year, but investors know that the realized level could be
The value of a firm is established by capitalizing its expected net operating income
(NOI=EBIT) at a constant rate, which is appropriate for the firms risk class.
L=Levered firm
U=Unlevered firm
12
Since V as established by proposition 1 is a constant, then under MM theory the value of
the firm is independent o f its leverage. This also implies that the WACC to any firm,
leveraged or not, is completely independent of its capital structure and is also equal to the
Thus, MM’s proposition 1 is identical to the Net Operating Income (NOI) hypothesis.
MM’s original work of 1958 assumed zero corporate tax. 5 years after, they published a
second article, which included the effects of corporate tax. They concluded that leverage
would increase a firm’s value because interest on debt is a tax-deductible expense, and
In the summary, they said that the value of a levered firm is equal to the value of
unlevered firm in the same risk class plus, the gain from leverage, which is the value of
the tax savings and equals the corporate tax rate times the amount of debt the firm uses,
that is;
Vl=V u+TD
In rejection to NI approach, MM argued that for two firms identical in all aspects except
for their capital structures, cannot command different market values or have different cost
of capital. Their opinion is that if these two firms have different market values, arbitrage
13
will take place to enable investors to engage in personal or homemade leverage as against
According to Van Home (2001), several indicators may be used in valuing a company.
Net Operating Income (NOI), which is the earnings from operations before interest and
taxes, is a useful tool in the evaluation of a firms earning power. If there are no recurring
items on the income statement, then NOI is equal to the Earnings Before Interest and
Taxes (EBIT).
Return On Net Assets (RONA) is the measure of the firm’s operating performance. It
indicates the firm’s earning power. It is a product o f assets turnover, gross profit margin
and operating leverage. Operating leverage is the change in EBIT for a given change in
sales.
RONA=EBIT/NA=SALES/NA*GP/SALES*EBIT/GP
Profitability is the net result of a large number of policies and decisions. It shows the
combined effects of liquidity, assets management, and debt management on the operating
results.
14
i) Profit margin on sales:
This is computed by dividing net income by sales, and it gives profit per shilling of sales.
This is calculated by dividing earnings before Interest and Taxes (EBIT) by the total
assets:
BEPR=EBIT/Total Assets
It is useful for comparing firms in different tax situations and with different degrees of
financial leverage.
The ratio of net income to Common Equity measures the return on Common Equity
These relate the firm’s stock price to its earnings and book value per share. These ratios
performance and future prospects. If the firm’s liquidity, asset management, debt
15
management, and profitability ratios are good, then its market value ratios will be high,
The price earnings ratio is used to value the firm’s performance as expected by investors.
discounting expected dividends to their present values. This rate is the risk free rate plus a
premium that is sufficient to compensate for the systematic risk associated with the
This method involves determining the market price per share by discounting the future
16
00
Po=lD7(l+k)‘
t=l
Where:
Dt =Expected Dividend
t=End of period t
The market price per share is multiplied by the number of outstanding shares to
determine the market value o f the firm. The total value of the Company’s existing stock
is equal to the discounted value of the total dividend stream, which will be paid to the
stock outstanding.
The book value concept is an Accounting concept where assets are recorded at their
historic value, and then depreciated over their useful life. The difference between the
The replacement value is the amount that a Company would be required to spend if it
were to replace all its existing assets in the current condition. This method ignores the
If a Company were to sell all its assets, after terminating its business the proceeds make
17
Going concern value is the amount that a Company could realize if it sold its business as
an operating one. The value includes the price paid for the intangible assets such as
goodwill.
The market value of an asset or security is the current price at which the asset or security
is being sold or bought in the market. For profitable firms, the market value is expected to
Some scholars however, seem to agree that the value of the firm is the worth of the
common stock which is a function of the expected return, risk to which the stockholder is
The expected return is the cash flows the stockholder is expected to receive in the future.
Risk is the degree of uncertainty that the expected cash flows will be received and timing
According to Pandey (1999), the value of a firm depends upon its expected earnings
An estimate of the expected returns from an investment encompasses the size but also the
The returns from an investment may take many forms such as earnings, dividends,
18
For an investor to calculate accurately the value of a security, he must be able to estimate
when the returns are likely to be received; and the pattern that they are received. This is
because of the time value of money. This knowledge will make it possible to properly
value the streams of returns relative to alternative investments with a different time
pattern of returns.
The required rate of returns on an investment is determined by the economy’s real risk
free rate of return, the expected rate of inflation during the holding period and a risk
All investments are affected by the risk-free rate and the expected rate of inflation
because these two variables determine the nominal risk-free rate. This implies that the
risk premium is the only factor that causes the difference in required rate of returns.
19
CHAPTER THREE
Research Methodology
3.1 Population
The population was made up o f all firms quoted at the Nairobi Stock Exchange. There are
3.2 Sample
The sample was made up of all those firms that consistently submitted their annual
returns in the period 1994 to 2002. All the 47 companies submitted their returns in that
period. This was therefore a census study. This period is considered long enough to
For the purpose of this study, data was purely secondary and was collected from financial
statements for firms that are quoted at the Nairobi Stock Exchange. This information is
available from the Nairobi Stock Exchange and the Capital Markets Authority. It
comprises of Profit before tax, number of outstanding shares, and share prices all of
20
3.4 Data Analysis
In analyzing the data simple regression analysis was used. The regression equation is in
Y= A + BX
Where:
A is the intercept of the regression equation which represents the firm value at zero profit.
B is the slope or gradient depicting change in the value o f the firm due to change in
profitability.
The regression model was used to find out if there exists a relationship between Net
Operating Income and the value o f the firms. The objective was achieved through
21
CHAPTER FOUR
4.1 Introduction
This empirical study sought to establish the relationship between profitability and firm
value. The hypothesis that there is no significant relationship between the two was tested
using linear regression analysis. Secondary Mean Market Value data (appendix ii) and
Mean Earnings Before Tax (appendix i) for the 47 companies was collected for 9 years
covering 1994 to 2002. The mean values calculated Mean Market Value and Mean
Earnings Before Tax for the 47 companies was then calculated and presented in appendix
iii.
Linear regression assumptions for the independent and dependent variables were first
verified. The response variable (Mean Market Value) was tested for normality conditions.
The constant variance of the distribution o f the dependent variable (Mean Market Value)
was also checked for constant for all values o f the independent variable (Mean Earnings
Before Tax). The relationship between the dependent variable and each independent °
variable was also checked for linearity through curve fitting. The linear regression
The distribution of the response variable (firm value) was found to be positively skewed
meaning that the normality assumption was not satisfied calling for transformation of
22
firm value data before linear regression analysis is conducted. Figure 4.1 presents the
Distribution o f the normalized transformed curve for the square root Mean Market Value
23
Figure 4.2: Square root transformed mean firm value (response variable)
10 T---------------------------- -------------------------------------------------- ------------------------------------------------------------------
Linearity assumption is achieved for the relationship between the dependent variable
(square root mean market value) and the independent variable (mean earnings before tax)
implying that linear regression analysis can be adopted to test the stated hypothesis. The
figure shows that there is no apparent deviation from randomness in the residuals
confirming that it is reasonable to model the relationship as linear. The fit shows that
there is a strict positive relationship between firm vale and firm earnings. An increase in
firm earnings corresponds to an increase in firm value and vice versa. The values for the
y-intercept for all the firms are consistently positive (>0) implying that firm earnings are
24
Figure 4.3: Linear Curve Fit
S q u a re R o o t M e a n M a rk e t V a lu e
m e a n E a rn in g s B e fo re T a x
The predicted model for the relationship between Mean Market Value and the Mean
Earnings Before Tax is Yj = 973.380 +0.740 X;, i= 1, 2, 3, ... 47. (Refer table 4.1). The
value 973.38 is the Y-intercept while 0.74 is the slope (gradient) for the regression
model. The intercept value (973.38) represents the Mean Market Value for all the 47
firms before factoring in Earnings Before Tax. The implication of the findings is that
firm earnings may not be the only factor contributing to the value o f the firm. That is to
say that there are other factors, which have significant impact on the value of the firm on
25
top o f firm earnings. The t-value (7.37) and the significance value (0.000) indicate that
slope (0.74) is significant. The interpretation of the slope is that there is a 0.74 increase in
firm value for every unit increase in firm earnings. The estimated linear regression model
can be used to predict the firm value for any specified firm earnings in the future.
On the basis of the F-value (54.315) and significance value/ p-value (0.000) at 95%
confidence level, the regression relationship between Mean Market Value and the Mean
Earnings is statistically significant. The implication of the finding is that firm Earnings
profitability will have an impact on the value of the firm. The null hypothesis (there is no
relationship between Net Operating Income and the value of a firm) is therefore rejected.
26
Multiple R-value for all the 47 firms is 0.73953 showing that there is a strong positive
relationship between the firm earnings and their values. As a result any change on the
profitability will have a great impact on the value o f the firm. Therefore as profit
increases the value of the firm also increases and vice versa. The interpretation is the
although there are other factors that contribute to firm value other than earnings, the latter
27
CHAPTER FIVE
The objective of this study was to ascertain whether there exists a relationship between
the profitability of a firm and its value for firms quoted on the Nairobi Stock Exchange.
The data used covers 9 years from 1994 to 2002 and was obtained from the Nairobi Stock
Exchange records.
The research tested the stated hypothesis by use o f F- significance ANOVA for to
determine the nature and magnitude of the relationship between the profitability and firm
value.
The regression relationship between Mean Market Value and the Mean Earnings is
statistically significant. Any change on the profitability will have an impact on the value
o f the firm. The null hypothesis is rejected and it is concluded that there is a strong
positive relationship between net operating income and the value of firms quoted at the
Nairobi Stock Exchange. Firm earnings remain a major determinant o f firm value.
first researched by early researchers like the Modigliani Miller (MM). This research is in
28
tandem and concurrence with earlier researches and supports the findings and
conclusions but has revealed that there are more variables that could be in play other than
The study was intended to use data for all the companies quoted on the Nairobi Stock
Exchange for a period of 10 years. This was not achieved due to lack of information
The data available could only allow a period coverage o f 9 years, possibly a large period
Interpreting financial statements was a problem as the data given was in summary form
statements.
The data collected comprised of book values only. Market values o f Companies could
There was limited time allocated to finish this study. Given more time the study would
have been more enhanced by comparing results with those of firms that are not quoted at
In the availability of more funds, more dimensions of this study can be looked at.
29
5.3 Suggestions for Further Research
A similar study could be carried out over a longer period o f time to obtain more reliable
findings.
Since this study used market values (Market capitalization) the same study should be
A study should be carried out to find out the relationship between firm value and other
factors such as agency costs, information asymmetry and debt value. The nature and
Since this study has used book values, a similar study using market values could be done
30
REFERENCES
Alexander A.R and Myers S.C (1965), Optimal Financing Decisions, Englewood Cliffs,
N.J: Prentice Hall Inc.
Altman I.E (1969), Corporate Bankruptcy Potential Stockholder Returns and Share
valuation. Journal of Finance, 887-900.
Brealy, R., and Myers, S. (2000), Principles of Corporate Finance, McGraw Hill Inc.
Donaldson, E.F. and Pfahl, J.K (1963) Corporate Finance. New York, Ronald Press Co.
Fama E.J (1978), The effects of a firm’s investment and financing decisions on the
welfare of its security holders. American Economic Review, 272-284.
Jensen M.C. (1986), Agency Costs of Free Cash Flow. Corporate Finance, and
Takeovers. American Economic Review, 323-329.
Miller, M.H (1998e), The M& M propositions 40 years later. European Financial
Management.
Miller, M.H (1999b), The History of Finance; An Eye witness Account. Journal of
Portfolio Management 25, 95-101.
Modigiliani, F. and Miller (June 1958), The Cost of Capital Corporation Finance and
The Theory of Investment, American Economic Review, 261-297.
31
Myers S.C and Majiluf S.N, (1984), Corporate financing and investment decisions
when firms have information that investors do not have. Journal of Finance, 187-
221.
Ross, J.A. (1978), The determination of Financial Structure: The incentive signaling
approach. The bell journal of Economics.
Solomon, E. (1963), Leverage and The Cost of Capital, Journal of Finance, 273-279.
Van Home, (2001), Financial Management and Policy, New Delhi, Prentice Hall of
India.
Weston, G. and Copeland (1992), Managerial Finance, New York, Dryden Press.
32
APPENDICES
Dear Sir/Madam,
To satisfy requirements for this research I am collecting data from your institution.
I would be grateful if you can allow me access to all the relevant information pertinent
for this research. The information requested is needed purely for academic purposes and
will be treated in strict confidence.
Yours Faithfully,
Supervisor
33
7.2 A P P E N D IX II: D A T A C O L L E C T IO N F O R M
COMPANY
34
73 A P P E N D IX III: L IS T O F C O M P A N IE S
Code COMPANY NAME
Cl Brook Bond Ltd
C2 Kakuzi Ltd
C3 Rea Vipingo Ltd
C4 Sasini Ltd
C5 Car & General Ltd
C6 CMC Ltd
C7 Kenya Airways Ltd
C8 Marshalls Ltd
C9 Nation Media Group
CIO Tourism Promotion Ltd
C ll Uchumi Supermarkets
C12 Barclays Bank
C13 CFC Ltd
C14 Diamond Trust
C15 HFCK
C16 ICDC Investment Ltd
C17 Jubilee Insurance Company
C18 Kenya Commercial Bank
C19 National Bank
C20 NIC bank ltd
C21 Pan African Insurance ltd
C22 Standard Chartered bank ltd
C23 Athi River mining
C24 Bamburi cement ltd
C25 BAT ltd
C26 BOC Kenya ltd
C27 Carbacid ltd
C28 Crown Berger ltd
C29 Dunlop ltd
C30 East African Cables ltd
C31 East African Portland ltd
C32 E.A Breweries ltd
C33 Firestone ltd
C34 Kenya Oil Co ltd
C35 Mumias Sugar Co ltd
C36 KPLC ltd
C37 Total Kenya ltd
C38 Unga Group
C39 A. Baumann ltd
C40 City trust ltd
C41 Eaagads ltd
C42 Express ltd
C43 Kapchorua Tea ltd
C44 Kenya Orchards ltd
C45 Limuru Tea
C46 Standard Newspaper ltd
C47 Williamson Tea ltd
35
7.4 A P P E N D IX IV: E A R N IN G S B E F O R E T A X E B T (0 0 0 ’S)
" 2002 2001 2000 1999 1998 1997 1996 1995 1994
36
7.4 A P P E N D IX IV: E A R N IN G S B E F O R E T A X E B T (0 0 0 ’S)
36
7.5 APPENDIX V: MARKET VALUE OF FIRMS (000) (MARKET
CAPITALIZATION)_________________________________________
2002 2001 2000 1999 1998 1997 1996 1995 1994
Cl 2639250 3519000 4740875 5083000 6891375 4088000 6891375 9286250 13147375
C2 287139 705599 1077999 1705199 2763598 1905160 2763598 1842399 2391199
C3 153000 174000 222000 276000 390000 276000 390000 200000 362000
C4 509722 752583 1320821 2109513 2964721 3009513 2964721 1964728 2553750
CS 222796 222796 423312 222796 267355 252772 267355 2552028 130X08
C6 418822 218516 388472 728385 874064 728385 874064 476486 694191
C7 3623681 3485196 3462116 3692921 3369790 2892921 3369790 3562591 3125754
C8 263393 263393 338237 374220 604510 274220 604510 395810 263873
C9 4492231 1541976 2460031 3565263 4884410 3765283 4884410 922215 827141
C IO 734901 657543 611128 620797 560845 590799 56084 602140 510118
C ll 996000 2730000 2565000 2880000 2760000 2740000 2530000 1690000 2240000
C 12 18685000 13424535 13967500 19075600 20059650 16675600 20059650 16609218 17466489
0 3 1104000 1080000 1206000 1425000 1510000 1505000 1510000 3000000 1500000
C 14 795000 715500 1113000 2067000 1749000 2067000 1749000 4134000 5183000
C 15 598000 690000 632500 1213250 1845750 1213250 1845750 1845750 1897500
C16 1044620 2163470 1899015 1808539 1109143 1808539 1109143 574534 565234
C 17 558000 558000 666000 927000 1080000 927000 1080000 1181250 1812500
C 18 2543200 2445960 2861100 3534300 6900300 3534300 6900300 7152750 7952175
C 19 730000 580000 630000 1000000 1720000 1000000 1720000 4550000 4550000
C 20 163566 1236218 1462858 2225192 2472436 2225192 2472436 1722656 1951172
C 21 336000 628800 528000 648000 325000 648000 325000 434000 416500
C 22 15329094 11620421 12238528 9312838 8323863 9312838 8323863 8735942 12279767
C 23 437100 342000 300000 431250 495000 431250 495000 345000 401000
C 24 15879457 6061415 12340637 9527194 13065542 9527194 13065542 5766271 10484129
C 25 5400000 4900000 6050000 5812500 5737500 5812500 5737500 6675000 16800000
C26 522293 585763 839594 1366781 1366781 1366781 1366781 1323629 1446405
C 27 404931 396436 462509 679605 613532 679605 613532 368709 400313
C 28 150990 107850 194130 215700 173638 215700 173638 587782 571605
C 29 50000 64000 100000 200000 100000 200000 100000 100000
C 30 186300 186300 187312 263250 405000 263250 405000 729000 708588
C31 1125000 990000 1116000 1260000 2115000 1260000 2115000 327000 300000
C 32 8995016 8405849 6260156 7300975 4340804 7300975 4340804 3522003 6347367
C 33 2421518 1948396 3199787 4453478 4481313 4453478 4481313 4592649 6865179
C34 816449 690453 816449 413988 421188 413988 421188 410388 350990
C35 1275000 3238500
C36 684457 2314494 4075092 8941464 10022880 8941464 10022880 1055040 514332
C37 3404560 1895896 3080000 2702000 2744000 2702000 2744000 4788000 7000000
C38 217113 410397 721624 1511194 2647519 1511194 2647519 760133 236897
C39 34560 26888 54912 65857 140942 65857 140942 115202 153603
C40 72905 67489 83320 97902 106234 97902 106234 116649 104151
C41 152745 164804 160785 271726 237961 271726 237961 321570 214520
C42 89520 80400 89520 144000 89520 144000 343200 504000
JC43 535944 547680 586800 489800 316872 489800 316872 528120 354036
C44 35129 2000 2000 2000 2000 2000 1200 1200
C45 236400 236400 130000 130000 130000 130000 130000 260000 200000
C46 489298 70465 94807 205630 153742 197630 153742 94606 17123
37
7.6 A P P E N D IX VI: M E A N V A L U E S (OOO’S)
E a rn in g s b e fo re ta x E B T M e a n M a r k e t V a lu e o f F ir m S q u a r e r o o t M a r k e t V a lu e o f F i r m
3 7 6 4 3 6 .2 6254056 2 5 0 0 .8 1
5 4 2 4 5 .2 2 1715766 1 3 0 9 .8 7
3 0 8 7 3 .5 6 2 7 1 4 4 4 .4 521
-1 7 2 8 9 .7 2016675 142 0 .1
6 4 1 2 .7 8 5 0 6 8 9 0 .9 7 1 1 .9 6
220493 6 0 0 1 5 3 .9 7 7 4 .7
1537458 3398307 1 8 4 3 .4 5
-2 0 8 9 7 .8 3 7 5 7 9 6 .2 6 1 3 .0 2
3 7 3 2 9 6 .2 3038107 1 7 4 3 .0 2
1 0 4 3 9 9 .8 5 4 9 3 7 2 .8 7 4 1 .2
3 6 5 1 2 0 .6 2347889 1 5 3 2 .2 8
3313111 17335916 4 1 6 3 .6 4
3 5 0 9 1 0 .1 1537778 1 2 4 0 .0 7
2 2 1 1 5 9 .7 2174722 1 4 7 4 .6 9
1 8 5 4 4 4 .7 1309083 1 1 4 4 .1 5
1 9 4 8 9 9 .3 134 2 4 7 1 1 1 5 8 .6 5
15 8 5 5 1 9 7 6 6 3 8 .9 9 8 8 .2 5
8 2 6 8 3 6 .1 4869376 2 2 0 6 .6 7
-1 0 1 0 2 1 1 183 1 1 1 1 1 3 5 3 .1 9
4 2 7 5 5 9 .8 1770192 1 3 3 0 .4 9
6 8 2 5 3 .7 8 4 7 6 5 8 8 .9 6 9 0 .3 5
2111540 10608573 3 2 5 7 .0 8
3 2 0 4 2 .1 1 4 0 8 6 2 2 .2 6 3 9 .2 4
9 5 1 7 9 7 .8 10635265 3 2 6 1 .1 8
1304517 6991667 2 6 4 4 .1 8
1 7 0 1 7 5 .1 1131645 1 0 6 3 .7 9
1 1 0 4 2 7 .9 5 1 3 2 4 1 .3 7 1 6 .4 1
7 7 9 0 7 .3 3 2 6 5 6 7 0 .3 5 1 5 .4 3
1 5 3 7 9 .5 114250 3 3 8 .0 1
57499 3 7 0 4 4 4 .4 6 0 8 .6 4
9 6 3 0 1 .7 8 1178667 1 0 8 5 .6 6
1471769 6312661 2 5 1 2 .5
6 5 3 4 8 9 .8 4099679 2 0 2 4 .7 7
3 3 7 3 9 7 .9 5 2 8 3 4 2 .3 7 2 6 .8 7
3 9 4 8 8 6 .5 2256750 1 5 0 2 .2 5
-4 6 1 8 1 5 5174678 2 2 7 4 .7 9
4 4 6 5 8 7 .4 3451162 1 8 5 7 .7 3
-2 2 7 7 6 2 1184843 1 0 8 8 .5 1
1 1 7 7 4 .5 6 8 8 7 5 1 .4 4 2 9 7 .9 1
1 8 9 1 6 .2 2 94754 3 0 7 .8 2
2 5 9 6 6 .1 1 2 2 5 9 7 7 .6 4 7 5 .3 7
1 8 2 8 6 .8 8 185520 4 3 0 .7 2
6 2 9 5 3 .7 8 4 6 2 8 8 0 .4 6 8 0 .3 5
-2 9 8 7 .7 5 5 9 4 1 .1 2 5 7 7 .0 8
1 5 1 8 7 .2 2 1 7 5 8 6 6 .7 4 1 9 .3 6
-3 4 0 1 2 .1 1 6 4 1 1 5 .9 4 0 5 .1 1
1 8 2 8 2 8 .2 6139425 2 4 7 7 .7 9
38